The securities have not been and will not be registered under the U.S. Securities Act of 1933, as amended or with any other regulatory authority of any State or other jurisdiction of the United States or Canada and (i) may not be offered, sold or delivered within the United States or Canada, or to, or for the account or benefit of any U.S. Person or Canadian, and (ii) may be offered, sold or otherwise delivered at any time only to transferees that are Non-United States Persons and Non-Canadians.

January 24, 2023

New Hampshire; Bank of Spain; BIS

Welcome to Swarm Markets’ media memo. This weekly update provides comments from Swarm Markets’ co-founders, Philipp Pieper and Timo Lehes, on key industry news that has caught our eye, plus our own developments.  

Comments available on the following news items:

  • New Hampshire governor plots potential US crypto regulatory path
  • Bank of Spain pushes on with stablecoins project
  • BIS paper considers DeFi x TradFi integration


New Hampshire plots way forward for US crypto regulations


In response to a White House executive order given last year, New Hampshire governor Chris Sununu has published recommendations for proposed digital asset market regulations that could help point the way forward for US crypto regulations.


While New Hampshire is far from the most influential state when considering global or even simply US financial and crypto markets, it does give us some insight into a potential direction of travel from a legislative perspective. 


The recommendations are straightforward enough – suggesting that key facets of the sector such as DAOs should receive legal recognition, provide funds for the legal system to handle blockchain-related matters and offer proactive guidance to financial institutions handling digital assets.


We’d hold back from calling the recommendations ‘light touch’ but they do stand in contrast to some of the more heavy-handed activities from authorities such as the SEC at the moment. Just last week the SEC announced it was suing Avraham Eisenberg for his extraction of around $116 million in funds from Mango Markets.


The Mango Markets issue raises important, almost philosophical, questions over crypto market regulation and highlights just how important the codification of a framework is. Eisenberg in effect used MNGO’s own code against it to drain the assets from the platform. Whether this is ‘legal’ or not is open to interpretation. But it was possible in the (flawed) construction of the platform code. 


In order to prevent these kinds of future attacks, specific, enforceable rules need to be applied that go beyond the scope of platform coding and protect users where firms sometimes fall short.


That is the duty of the regulator. Until that duty is specifically legislated, we’ll continue to see loophole cases that end in institutions, such as the SEC, taking extraordinary actions that strike the sector as overly aggressive, or which could have unintended consequences for other digital assets. 


Bank of Spain signs off stablecoin project


The Bank of Spain has signed off on a pilot program for the issuance of euro-backed stablecoins via fintech firm MONEI. The project has the involvement of major Spanish banking institutions such as Caixabank and BBVA. 


We’re likely to see a growing bank of stablecoin projects get underway in the near future, as the case for stablecoins as a key component of the digital assets market grows. Stablecoins are a crucial technological bridge between TradFi and the digital asset ecosystem, which is only set to grow and multiply in terms of use cases and practical applications. 


The tokenization of broad areas of the financial system is already underway and will be one of the defining trends of the digital assets market this year. Valuation issues have persisted in the crypto market thanks to the creation of synthetic tokens that don’t offer anything like collateral confidence to market participants.


Instead, we see a major movement of asset digitisation to provide the underpinning of the future financial system. Stablecoins will provide a key exchange point for these digital assets and will help form the bridge between traditional assets and developing DeFi technologies.


The Bank of Spain is doing well to move as quickly as it can. Other regions such as the UK are already making very significant legislative moves into the space so there’s an arms race of sorts emerging over which financial centers will become the hub for stablecoin issuance and transaction. The potential rewards as this market grows will be significant. 


With regards to the specific Monei project, it will be interesting to see how it evolves in practical terms. One of the drawbacks of similar euro stablecoin projects is the requirements around e-money licensing. This could be a barrier to entry for some potential participants so it will be interesting to see how some of the practicalities play out. 


BIS launches TradFi/DeFi integration report


The Bank for International Settlements (BIS) – which is the so-called central bank for central bankers – has published a report on the potential for DeFi integration into TradFi. The TLDR of the report is that BIS sees DeFi as a potential future-shaping technological change for TradFi and a potential game changer in three key areas – automation, engineering and transparency. 


BIS is deeply involved in many aspects of the development of DeFi technology within the wider financial ecosystem, most notably with Project Marianna, so is well-positioned to look at how DeFi can better integrate into TradFi infrastructure – something we see as the ultimate path for DeFi as the sector develops. 


BIS hits upon one of the key features of this development that Swarm sees as key to greater integration – moving beyond the ‘crypto’ market to the provision of digital real world assets (RWAs). We’re still at a relatively early point in the proliferation of DeFi technology and there are many distracting elements in the sector that detract from this central point. 


DeFi will prove itself useful to TradFi by solving real world problems, innovating to make TradFi more efficient, transparent and secure. By removing centralized intermediaries, DeFi can help to provide more efficient markets while simplifying processes and removing fee-taking middlemen. 


BIS’s paper also tackles another area of development for DeFi though, looking at the inherent complexity of the technologies. But far from dismissing this as an issue, BIS says that DeFi must help TradFi institutions to access and use this technology. 


This will most certainly aid further integration of the two sectors and drive engagement at a time when many major players still need convincing of the opportunities that DeFi offers.